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Friday, July 12, 2013

On Foreclosures, Liens, and Innovating Around Red Tape

I read an interesting article in Wednesday's Wall Street Journal about foreclosures in the Las Vegas real estate market. Some key points from the article (not sure if the link is paywalled. I'm a new WSJ subscriber):

Las Vegas was one of the worst examples of overbuilding in the lead up to the 2008 housing price collapse and foreclosure crisis. In retrospect, it is no surprise because Las Vegas was overbuilt. In the wake of the housing price collapse, the severity of the problems in Las Vegas was greater than in other jurisdictions in the United States.

In response to subsequent problems (e.g., the robo-signing scandal of 2010), the State of Nevada passed a law (A.B. 284) that targeted foreclosure fraud with aggressive (and ambiguous) language that includes jailing bankers who are not in strict adherence to the law.

The result of the law was a steep drop in foreclosures -- an 88% drop in default notices in the first month the law took effect -- but not such a sharp change in the number of properties in default.

Although the number of properties in default was about the same, the number of foreclosures for sale drastically decreased. A large number of houses remained vacant.

The article is interesting in that it goes on to describe how this law has indirectly become a boon for builders and owners of non-foreclosed property. At the same time, the number of vacant, foreclosed properties on the market was creating problems for neighborhoods and homeowner's associations. This brings me to the most interesting quote in the article, and the reason for my writing this post:

A lag in foreclosures has had other deleterious effects. Homeowners' associations aren't collecting dues from borrowers who are behind on their mortgages. Some associations have begun taking advantage of their rights to file liens ahead of the bank—and then sell the liens to investors, who pay a few thousand dollars for the right to take control of the home until the bank forecloses.

Investors buy the liens "in the hopes that the mortgage is going to be lost in la-la-land, and the bank won't foreclose for six months or two years," says Richard Weiss, a real-estate investor who said he has taken ownership of around seven properties. While waiting for the bank to get its act together and foreclose, "you can do whatever you want—put a tenant in there and collect the rent," says Mr. Weiss.

Investors "know they can rent out these properties and get a cash flow without having to spend much money," says Xenophon Peters, an attorney who represents clients facing foreclosure at the law firm Peters & Associates LLP. He says a few large investors have been buying up hundreds of the liens. The practice is "terrible" but legal, he said. "They're just taking advantage of the law."

In my mind, the terrible part of this situation is that the house is vacant, abandoned, and reducing the neighborhood's value because of an ill-conceived law. The heroes in this story are the HOAs and investors who have innovated around the law to mitigate some of its adverse effects.